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EX-32.1 - EXHIBIT 32.1 - CALMARE THERAPEUTICS Incv377106_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - CALMARE THERAPEUTICS Incv377106_ex31-1.htm



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

or

 

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                          to                                                    

 

Commission file number 001-08696

 

COMPETITIVE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

www.competitivetech.net

Delaware 36-2664428
(State or other jurisdiction of incorporation or
organization)
(I. R. S. Employer Identification No.)
   
1375 Kings Highway East, Suite 400 Fairfield,
Connecticut
06824
(Address of principal executive offices) (Zip Code)

 

(203) 368-6044
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.

Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer, large accelerated filer and smaller reporting company" as defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨ Accelerated filer  ¨
Non-accelerated filer    ¨ (Do not check if a smaller reporting company) Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). 

Yes ¨ No x

 

The number of shares of the registrant’s common stock outstanding as of May 14, 2014 was 22,463,532 shares.

 



 

 
 

 

COMPETITIVE TECHNOLOGIES, INC.

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Condensed Consolidated Interim Financial Statements (unaudited) 3
     
  Condensed Consolidated Balance Sheets at March 31, 2014 (unaudited) and December 31, 2013 3
     
  Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2014 and March 31, 2013 4
     
  Condensed Consolidated Statement of Changes in Shareholders’ Deficit for the three months ended March 31, 2014 (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2014 and March 31, 2013 6-7
     
  Notes to Condensed Consolidated Interim Financial Statements (unaudited) 8-20
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-28
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
     
Item 4. Controls and Procedures 28
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 29
     
Item 1A. Risk factors 29
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
     
Item 3. Defaults Upon Senior Securities 30
     
Item 4. Mine Safety Disclosures 30
     
Item 5. Other Information 30
     
Item 6. Exhibits 30
     
Signatures 31
      
Exhibit Index

 

2
 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Interim Financial Statements

 

COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

 

   March 31,
2014
   December 31,
2013
 
   (Unaudited)     
Assets          
Current Assets:          
Cash  $343,748   $57,009 
Receivables, net of allowance of $101,154 at March 31, 2014 and December 31, 2013   86,317    143,330 
Inventory   4,248,220    4,278,220 
Prepaid expenses and other current assets   48,095    65,167 
Total current assets   4,726,380    4,543,726 
           
Property and equipment, net   8,860    7,606 
Security deposits   15,000    15,000 
TOTAL ASSETS  $4,750,240   $4,566,332 
           
Liabilities and Shareholders' Deficit          
Current Liabilities:          
Accounts payable  $650,254   $692,251 
Liabilities under claims purchase agreement   2,013,320    2,093,303 
Accounts payable, GEOMC   4,183,535    4,183,535 
Accrued expenses and other liabilities   803,678    582,987 
Notes payable   2,596,746    2,488,691 
Deferred revenue   19,687    6,400 
Warrant liability   -    8,227 
Series C convertible preferred stock derivative liability   66,176    80,408 
Series C convertible preferred stock liability   375,000    375,000 
Total current liabilities   10,708,396    10,510,802 
           

Note payable – long-term

   

34,272

    - 
           
Commitments and Contingencies          
Shareholders’ deficit:          
5% preferred stock, $25 par value, 35,920 shares authorized, 2,427 shares issued and outstanding   60,675    60,675 
Series B preferred stock, $0.001 par value, 20,000 shares authorized, no shares issued and outstanding   -    - 
Series C convertible preferred stock, $1,000 par value, 750 shares authorized, 375 shares issued and outstanding   -    - 
Common stock, $.01 par value, 40,000,000 shares authorized, 22,463,532 shares issued and outstanding at March 31, 2014 and 19,952,907 shares issued and outstanding at December 31, 2013   224,635    199,529 
Capital in excess of par value   46,730,636    46,077,394 
Accumulated deficit   (53,008,374)   (52,282,068)
Total shareholders’ deficit   (5,992,428)  (5,944,470)
           
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT  $4,750,240   $4,566,332 

  

See accompanying notes

 

3
 

 

COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Operations

(Unaudited)

 

   Three
months
ended
   Three
 months
ended
 
   March 31,
2014
   March 31,
2013
 
Revenue          
Product sales  $221,080   $- 
Cost of product sales   70,218    19,348 
Gross profit from product sales   150,862    (19,348)
           
Other Revenue          
Retained royalties   2,604    13,376 
Other income   3,821    48,679 
Total other revenue   6,425    62,055 
           
Expenses          
           
Selling expenses   71,994    68,175 
Personnel and consulting expenses   395,023    341,007 
General and administrative expenses   193,721    400,759 
Interest expense   104,786    32,767 
Loss on settlement of note and warrant   132,301    - 
Unrealized gain on derivative instruments   (14,232)   (18,167)
Total Expenses   883,593    824,541 
           
Loss before income taxes   (726,306)   (781,834)
Provision (benefit) for income taxes   -    - 
           
Net loss  $(726,306)  $(781,834)
           
Basic loss per share  $(0.04)  $(0.05)
           
Basic weighted average number of common shares outstanding:   20,036,240    15,588,693 
           
Diluted loss per share  $(0.04)  $(0.05)
           
Diluted weighted average number of common shares outstanding:   20,036,240    15,588,693 

 

See accompanying notes

 

4
 

  

PART I.  FINANCIAL INFORMATION (Continued)

 

COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARY

Condensed Consolidated Statement of Changes in Shareholders' Deficit

For the Three Months Ended March 31, 2014

(Unaudited)

 

    Preferred Stock     Common Stock     Capital           Total  
    Shares
outstanding
    Amount     Shares
outstanding
    Amount     in excess
of par 
value
    Accumulated
deficit
    shareholders’
deficit
 
                                           
Balance January 1, 2014     2,427     $ 60,675       19,952,907     $ 199,529     $ 46,077,394     $ (52,282,068 )   $ (5,944,470 )
                                                         
Net loss     -       -       -       -       -       (726,306 )     (726,306 )
Common stock issued to directors     -       -       10,625       106      

3,932

      -       4,038  
Stock option compensation expense     -       -       -       -       14,328       -       14,328  
Private offering of common stock and warrants     -       -       2,500,000       25,000       475,000       -       500,000  
Warrant and beneficial conversion feature on notes payable     -       -       -       -      

53,338

      -       53,338  
Liabilities settled under Liability Purchase Agreement                                     106,644               106,644  
Balance March 31, 2014     2,427     $ 60,675       22,463,532     $ 224,635     $ 46,730,636     $ (53,008,374 )   $ (5,992,428 )

 

See accompanying notes

 

5
 

  

PART I.  FINANCIAL INFORMATION (Continued)

 

COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Three months
ended
   Three months
ended
 
   March 31, 
2014
   March 31, 
2013
 
Cash flows from operating activities:          
           
Net loss  $(726,306)  $(781,834)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,824    2,336 
Stock option compensation expense   14,328    111,437 
Share-based compensation – common stock   4,038    7,000 
Bad debt expense   -    5,000 
Debt discount amortization   61,364    - 
Noncash finance charges   18,434    - 
Unrealized gain on derivative instruments   (14,232)   (18,167)
Loss on settlement of note and warrant   132,301    - 
Changes in assets and liabilities:          
     Receivables   57,013    132,747 
     Prepaid expenses and other current assets   17,072    56,188 
     Inventory   30,000    - 
     Accounts payable, accrued expenses and other liabilities   178,694    (32,745)
     Deferred revenue   13,287    (1,600)
Net cash used in operating activities   (212,183)   (519,638)
           
Cash flows from investing activities:          
Purchase of property and equipment   (3,078)   - 
Cash used in investing activities   (3,078)   - 
           
Cash flows from financing activities:          
Proceeds from note payable   120,000    505,000 
Repayment of note and warrant settlement   (118,000)   - 
Proceeds from common stock and warrants   500,000    - 
Net cash provided by financing activities   502,000    505,000 
           
Net increase (decrease) in cash   286,739    (14,638)
           
Cash at beginning of period   57,009    74,322 
           
Cash at end of period  $343,748   $59,684 

  

6
 

  

Supplemental disclosure of non-cash transactions:

  

In September 2013 the Company issued 1,618,235 shares of the Company’s common stock to ASC Recap. During September and October 2013, ASC Recap sold the Company’s common stock and during the three months ended March 31, 2014 paid creditors approximately $80,000 from the proceeds and retained a service fee of approximately $27,000 (see Note 10).

 

During the three months ended March 31, 2013, the Company transferred a rental asset with a net book value (“NBV”) of approximately $8,000 to inventory.

 

During the three months ended March 31, 2013, the Company issued 500,000 shares of its common stock into escrow, pending the completion of potential financing with a European investment group.

 

During March 2013, the Company issued 100,000 shares of its common stock at $0.43 per share for legal services.

  

See accompanying notes

 

7
 

  

PART I.  FINANCIAL INFORMATION (Continued)

 

COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARY

 

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

1.    BASIS OF PRESENTATION

 

The interim condensed consolidated financial information presented in the accompanying condensed consolidated financial statements and notes hereto is unaudited.

 

Competitive Technologies, Inc. (“CTI”) and its majority-owned (56.1%) subsidiary, Vector Vision, Inc. (“VVI”), (collectively, the “Company”, “we” or “us”) is a biotechnology company developing and commercializing innovative products and technologies. CTI is the licensed distributor of the non-invasive Calmare® pain therapy medical device, which incorporates the biophysical “Scrambler Therapy”® technology developed to treat neuropathic and cancer-derived pain.

 

These consolidated financial statements include the accounts of CTI and VVI.  Inter-company accounts and transactions have been eliminated in consolidation.

 

We believe we have made all adjustments necessary, consisting only of normal recurring adjustments, to present the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S.  The results for the three months ended March 31, 2014 are not necessarily indicative of the results that can be expected for the full year ending December 31, 2014.

 

The interim unaudited condensed consolidated financial statements and notes thereto, should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) on April 16, 2014.

 

During the three months ended March 31, 2014, we had a significant concentration of revenues from our Calmare® pain therapy medical device.  The percentages of gross revenue attributed to sales and rentals of Calmare devices, in the three months ended March 31, 2014, was 98%; and 13% in the three months ended March 31, 2013.  Additionally, the percentage of gross revenue attributed to other Calmare related sales of equipment and training, in the three months ended March 31, 2014, was 1%; and 66% in the three months ended March 31, 2013.  We continue to attempt to expand our sales activities for the Calmare device and expect the majority of our revenues to come from this technology.

 

The Company has incurred operating losses since fiscal 2006 and has a working capital deficiency at March 31, 2014.  The Company has taken steps to reduce its operating expenses as well as increase revenue from sales of Calmare medical devices.  However, even at the reduced spending levels, should the anticipated increase in revenue from sales of Calmare devices not occur the Company may not have sufficient cash flow to fund operations through 2014.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include adjustments to reflect the possible future effect of the recoverability and classification of assets or amounts and classifications of liabilities that may result from the outcome of this uncertainty.

 

The Company's continuation as a going concern is dependent upon its developing recurring revenue streams sufficient to cover operating costs.  The Company does not have any significant individual cash or capital requirements in the budget going forward.  If necessary, CTI will meet anticipated operating cash requirements by further reducing costs, issuing debt and/or equity, and/or pursuing sales of certain assets and technologies while we pursue licensing and distribution opportunities for our remaining legacy portfolio of technologies.  There can be no assurance that the Company will be successful in such efforts.  Failure to develop a recurring revenue stream sufficient to cover operating expenses could negatively affect the Company’s financial position.

 

8
 

  

Our liquidity requirements arise principally from our working capital needs, including funds needed to sell our current technologies and obtain new technologies or products, and protect and enforce our intellectual property rights, if necessary. We fund our liquidity requirements with a combination of cash on hand, debt and equity financing, sales of common stock and cash flows from operations, if any, including royalty legal awards. At March 31, 2014, the Company had outstanding debt in the form of promissory notes with a total principal amount of $3,277,000 and a carrying value of $3,117,000.

 

The Company acquired the exclusive, worldwide rights to the Scrambler Therapy® technology in 2007. The Company’s original 2007 agreement with Giuseppe Marineo (the "Scrambler Therapy Agreement"), an inventor of Scrambler Therapy technology, and Delta Research and Development, authorized CTI to manufacture and sell worldwide the device developed from the patented Scrambler Therapy technology. The original agreement was amended in 2011 to provide the Company with exclusive rights to the Scrambler Therapy technology through March 31, 2016. In July 2012, the Company attempted to negotiate a five-year extension to the agreement with Marineo and Delta (the “2012 Amendment”). However, a valid contract was never formed as the 2012 Amendment was not executed by Marineo and Delta. The Scrambler Therapy technology is patented in Italy and in the U.S. Applications for patents have been filed internationally as well and are pending approval. The Calmare device has CE Mark certification from the European Union as well as U.S. FDA 510(k) clearance. CTI’s partner, GEOMC Co., Ltd. of Korea, is manufacturing the product commercially under a ten (10) year agreement through 2017. Sales of these devices are expected to provide a significant proportion of the Company’s revenue for the next several years.

  

2.    NET INCOME (LOSS) PER COMMON SHARE

 

The following sets forth the denominator used in the calculations of basic net income (loss) per share and net income (loss) per share assuming dilution:

  

     Three months
ended
   Three months
ended
 
     March 31,
2014
   March 31,
2013
 
  Denominator for basic net income (loss) per share, weighted average shares outstanding   20,036,240    15,588,693 
  Dilutive effect of common stock options   N/A    N/A 
  Dilutive effect of Series C convertible preferred stock, convertible debt and warrants  N/A   N/A 
  Denominator for diluted net income (loss) per share, weighted average shares outstanding  20,036,240   15,588,693 

 

Due to the net loss incurred for the three months ended March 31, 2014, and March 31, 2013, the denominator used in the calculation of basic net loss per share was the same as that used for net loss per share, assuming dilution, since the effect of any options, convertible preferred shares, convertible debt or warrants would have been anti-dilutive. Options to purchase 1,409,000 and 1,367,000 shares of our common stock were outstanding at March 31, 2014 and 2013, respectively, 375 shares outstanding of Series C Convertible Preferred Stock, at March 31, 2014 and 2013, outstanding convertible debt of $3,117,000 and $2,040,000 at March 31, 2014 and 2013, respectively and the warrants outstanding at March 31, 2014 were not included in the computation of diluted net income (loss) per share because they were also anti-dilutive.

 

9
 

  

3.    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

No new accounting pronouncements issued or effective during the quarter ended March 31, 2014 has had or is expected to have a material impact on the consolidated financial statements.

  

4.    RECEIVABLES

 

Receivables consist of the following:

 

   March 31, 
2014
   December 
31, 
2013
 
Calmare® sales receivable  $86,023   $132,850 
Royalties, net of allowance of $101,154 at March 31, 2014 and December 31, 2013   -    10,086 
Other   294    394 
Total receivables  $86,317   $143,330 

 

5.    AVAILABLE-FOR-SALE AND EQUITY SECURITIES

 

The fair value of the equity securities we held were categorized as available-for-sale securities, which were carried at a fair value of zero, consisted of shares in Security Innovation and Xion Pharmaceutical Corporation (“Xion”).  We own 223,317 shares of stock in the privately held Security Innovation, an independent provider of secure software located in Wilmington, MA.

 

In September 2009 we announced the formation of a joint venture with Xion for the commercialization of our patented melanocortin analogues for treating sexual dysfunction and obesity.  CTI currently owns 60 shares of common stock or 30% of the outstanding stock of privately held Xion.

 

6.    FAIR VALUE MEASUREMEMENTS

 

The Company measures fair value in accordance with Topic 820 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Fair Value Measurement (“ASC 820”), which provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described as follows:

  

  Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
       
  Level 2 - Inputs to the valuation methodology include:
    Quoted prices for similar assets or liabilities in active markets;
    Quoted prices for identical or similar assets or liabilities in inactive markets;
    Inputs other than quoted prices that are observable for the asset or liability;
   

Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

    If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
       
  Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement

 

The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

10
 

  

The Company values its derivative liability associated with the variable conversion feature on its Series C Convertible Preferred Stock (Note 12) based on the market price of its common stock.  For each reporting period the Company calculates the amount of potential common stock that the Series C Preferred Stock could convert into based on the conversion formula (incorporating market value of our common stock) and multiplies those converted shares by the market price of its common stock on that reporting date.  The total converted value is subtracted by the consideration paid to determine the fair value of the derivative liability. The Company classified the derivative liability of $66,000 and $80,000 at March 31, 2014 and December 31, 2013, respectively, in Level 2 of the fair value hierarchy.

 

The warrant issued in connection with the Tonaquint Note (the “Tonaquint Warrants,”see Note 11) were measured at fair value and liability-classified because the Tonaquint Warrants contain “down-round” protection and therefore do not meet the scope exception under FASB ASC 815, Derivatives and Hedging (“ASC 815”). Since “down-round” protection is not an input to the fair value of the warrants, the warrants cannot be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined under ASC 815.  The Company valued the warrants at $8,000 at December 31, 2013, and $26,076 upon issuance July 16, 2013, in Level 3 of the fair value hierarchy. During the first quarter of 2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant (see Note 11).

 

Similarly, the conversion feature of the Tonaquint Note (Note 11) also contained “down-round” protection and therefore did not meet the scope exception under FASB ASC 815.  The Company classified the derivative liability of $0 at December 31, 2013, and $19,024 upon issuance at July 16, 2013, in Level 3 of the fair value hierarchy. During the first quarter of 2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant (see Note 11).

 

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in a different fair value measurement at the reporting date.

 

The carrying amounts reported in our Condensed Consolidated Balance Sheet for cash, accounts receivable, notes payable, deferred revenue, and preferred stock liability approximate fair value due to the short-term maturity of those financial instruments.

  

7.           PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following:

 

   March 31,
 2014
   December
31,
 2013
 
Prepaid insurance  $15,230   $16,802 
Other   32,865    48,365 
Prepaid expenses and other current assets  $48,095   $65,167 

 

8.           PROPERTY AND EQUIPMENT

 

Property and equipment, net, consist of the following:

 

   March 31, 
2014
   December
31, 2013
 
Property and equipment, gross  $180,615   $177,537 
Accumulated depreciation and amortization   (171,755)   (169,931)
Property and equipment, net  $8,860   $7,606 

 

Depreciation and amortization expense was $1,824 and $2,336 during the three months ended March 31, 2014 and March 31, 2013, respectively.

 

11
 

  

9.           ACCRUED EXPENSES AND OTHER LIABILITIES

 

Accrued expenses and other liabilities consist of the following:

 

   March 31,
 2014
   December
31,
 2013
 
         
Royalties payable  $155,208   $127,708 
Accrued compensation   135,000    - 
Accrued accounting fees   80,000    82,141 
Commissions payable   21,975    21,975 
Accrued interest payable   241,487    216,518 
Other payables   170,008    134,645 
Accrued expenses and other liabilities, net  $803,678   $582,987 

  

Excluded above is approximately $235,000 and $244,000 of accrued expenses and other liabilities at March 31, 2014 and December 31, 2013, respectively, that fall under the Liability Purchase Agreement (“LPA”) with ASC Recap, LLC (“ASC Recap”), and are expected to be repaid using the process as described in Note 10.  Because there can be no assurance that the Company will be successful in completing this process, the Company retains ultimate responsibility for these liabilities, until fully paid down.

 

10.          LIABILITIES ASSIGNED TO LIABILITY PURCHASE AGREEMENT

 

During the third quarter of 2013, the Company negotiated a LPA with Southridge, Partners II, L.P. (“Southridge”). The LPA takes advantage of a provision in the Securities Act of 1933, Section 3(a)(10), that allows the exchange of claims, securities, or property for stock when the arrangement is approved for fairness by a court proceeding. The process, approved by the court in August 2013, has the potential to eliminate nearly $2.1 million of our financial obligations to existing creditors who agreed to participate and executed claims purchase agreements with Southridge’s affiliate ASC Recap” accounting for $2,093,303 of existing payables, accrued expenses and other current liabilities, and notes payable. The process began with the issuance in September 2013 of 1,618,235 shares of the Company’s common stock to ASC Recap. During September and October 2013, ASC Recap sold the Company’s common stock and during the three months ended March 31, 2014 paid creditors approximately $80,000 from the proceeds and retained a service fee of approximately $27,000. As of May 14, 2014, no further shares of the Company’s common stock had been issued to ASC Recap to settle creditors’ balances.

 

There can be no assurance that the Company will be successful in completing this process with Southridge, and the Company retains ultimate responsibility for this debt, until fully paid.

 

12
 

 

11.           NOTES PAYABLE

 

Notes payable consist of the following:

 

   March 31, 
2014
   December 31, 
2013
 
90 day Convertible Notes (Chairman of the Board)  $2,498,980   $2,518,000 
24 month Convertible Notes ($100,000 to Board member)   225,000    225,000 
Tonaquint 9% OID Convertible Notes and Warrants   118,536    87,705 
Southridge Convertible Note   12,000    12,000 
Series A1 15% OID Convertible Notes and Warrants   100,076    81,415 
Series A2 15% OID Convertible Notes and Warrants   91,127    69,571 
Series A3 15% OID Convertible Notes and Warrants   37,007    - 
Series B OID Convertible Notes and Warrants   34,272    - 
Notes Payable, gross   3,116,998    2,933,691 
Less LPA amount   (485,980)   (505,000)
Notes Payable, net  $2,631,018   $2,488,691 

   

Details of notes payable as of March 31, 2014 are as follows:

 

    Principal
Amount
    Carrying
Value
    Cash
Interest
Rate
    Common
Stock
Conversion
Price
    Maturity
Date
90 day Convertible Notes (Chairman of the Board)   $ 2,498,980     $ 2,498,980       6 %   $ 1.05     Various 2014
24 month Convertible Notes ($100,000 to Board member)     225,000       225,000       6 %     1.05     March 2014 –
June 2014
Tonaquint 9% OID Convertible Notes (1)     112,500       118,536       7 %     0.30     May 2014
Southridge Convertible Note     12,000       12,000       None       75% of closing
bid
    June 2014
Series A1 15% OID Convertible Notes and Warrants     149,412       100,076       None       0.20     August 2014
Series A2 15% OID Convertible Notes and Warrants     134,236       91,127       None       0.25     September 2014
Series A3 15% OID Convertible Notes and Warrants     64,706       37,007       None       0.25     January 2015
Series B OID Convertible Notes and Warrants     80,000       34,272       None       0.35     March 2017
Notes Payable, gross   $ 3,276,834       3,116,998                      
Less LPA amount             (485,980 )                    
Notes Payable, net           $ 2,631,018                      

  

  (1) Original terms noted above. The Company executed a debt settlement agreement with Tonaquint during the first quarter of 2014, cash-settled the warrant during the first quarter of 2014 and cash-settled the note during the second quarter of 2014. See further discussion below under “Tonaquint 9% Original Issue Discount Convertible Notes and Warrants”.

 

13
 

  

90 day Convertible Notes

The Company has issued 90-day notes payable to borrow funds from a director, now the chairman of our Board, as follows:

 

2013   $ 1,188,980  
2012     1,210,000  
2011     100,000  
Total   $ 2,498,980  

  

These notes have been extended several times and all bear 6.00% simple interest.  A conversion feature was added to the Notes when they were extended, which allows for conversion of the eligible principal amounts to common stock at any time after the six month anniversary of the effective date –the date the funds are received – at a rate of $1.05 per share.  Additional terms have been added to all Notes to include additional interest payments to all Notes if extended beyond their original maturity dates and to provide the lender with a security interest in unencumbered inventory and intangible assets of the Company other than proceeds relating to the Calmare device and accounts receivable.

 

A total of $485,980 of the aforementioned notes issued between December 1, 2012 and March 31, 2013 fall under the LPA with ASC Recap, and are expected to be repaid using the process as described in Note 10.  Because there can be no assurance that the Company will be successful in completing this process, the Company retains ultimate responsibility for this debt, until fully paid down.  As a result, the Company continues to accrue interest on these notes and they remain convertible as described above.

 

24 month Convertible Notes

In March 2012, the Company issued a 24-month convertible promissory note to borrow $100,000. Additional 24-month convertible promissory notes were issued in April 2012 ($25,000) and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion of the eligible principal amounts to common stock is allowed at any time after the six month anniversary of the effective date of each note at a rate of $1.05 per share.

 

As of May 14, 2014 the Company has not repaid the principal due on the March 2012 $100,000 note or the April 2012 $25,000 note and as such is in default under the terms of the notes. There is also unpaid interest related to these notes.

 

Tonaquint 9% Original Issue Discount Convertible Notes and Warrants

During the quarter ended September 30, 2013, the Company entered into a securities purchase agreement with Tonaquint, Inc., under which it was issued a $112,500 convertible promissory note in consideration for $100,000, the difference between the proceeds from the Note and the principal amount consisted of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue discount was being amortized over the life of the note. The note was convertible at an initial conversion price of $0.30 per share at any time, and contained a “down-round protection” feature that requires the valuation of a derivative liability associated with the note. The note bore interest at 7% and was due in May 2014. Tonaquint was also issued a market-related warrant for $112,500 in shares of common stock with a “cashless” exercise feature. The warrant had a $0.35 exercise price, a 5-year term and included a “down-round protection” feature that required it to be classified as a liability rather than as equity (see Note 6).

 

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During the first quarter of 2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant. The warrant was settled during the first quarter of 2014 for a cash payment of $98,000, resulting in a loss of $98,000. The note was settled during the second quarter of 2014 for cash payments totaling $144,000 ($20,000 paid in the first quarter of 2014 and $124,000 paid in the second quarter of 2014). Because the execution of the debt settlement agreement in the first quarter of 2014 resulted in a significant modification of the original terms of the note agreement, the Company adjusted the carrying value of the note in the first quarter of 2014 and recorded a related loss of approximately $34,000.

 

Southridge

During 2013, the Company issued a six-month $12,000 convertible note payable to Southridge to cover legal expenses as part of the LPA (see Note 10). The convertible note is convertible into the Company’s common stock at 75% of the lowest closing bid price during the twenty (20) trading days prior to conversion and is due in June 2014.

 

Series A 15% Original Issue Discount Convertible Notes and Warrants

During the quarter ended December 31, 2013, the Company did a private offering of two tranches of convertible notes and warrants, under which it issued $283,648 of convertible promissory notes for consideration of $241,100, the difference between the proceeds from the notes and the principal amount consists of $42,548 of original issue discount. During the quarter ended March 31, 2014, the Company did a private offering of a third tranche of convertible notes and warrants, under which it issued $64,706 of convertible promissory notes for consideration of $55,000, the difference between the proceeds from the notes and principal amount consists of $9,706 of original issue discount. The notes are convertible at initial conversion prices ranging from $0.20 to $0.25 per share anytime after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 958,179 in shares of common stock. The warrants have exercise prices that range from $0.40 to $0.60 and a 2-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.

 

The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:

 

   Warrants
(Tranche 1)-
November 15,
2013
   Warrants
(Tranche 2)-
December 30,
2013
   Warrants
(Tranche 3)-
February 14,
2014
 
Expected term   2 years    2 years    2 years 
Volatility   180.02%   184.38%   184.88%
Risk Free Rate   0.31%   0.39%   0.32%

 

The proceeds of the Notes issued during the three months ended March 31, 2014 were allocated to the components as follows:

 

    Proceeds allocated
at issue date
 
Private Offering Notes   $ 32,390  
Private Offering Warrants     14,845  
Beneficial Conversion feature     7,765  
Total   $ 55,000  

 

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Series B Original Issue Discount Convertible Notes and Warrants

During the quarter ended March 31, 2014, the Company did a private offering of convertible notes and warrants, under which it issued $80,000 of convertible promissory notes for consideration of $65,000, the difference between the proceeds from the notes and principal amount consists of $15,000 of original issue discount. The notes are convertible at an initial conversion price of $0.35 per share anytime after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 185,714 in shares of common stock. The warrants have an exercise price of $0.45 and a 4-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.

 

The beneficial conversion feature was valued at the intrinsic value on the issuance date. The intrinsic value represents the difference between the conversion price and the fair value of the common stock multiplied by the number of share into which the note is convertible. We estimated the fair value of the warrants on the issue date using a Black-Scholes pricing model with the following assumptions:

 

    Warrants
March 20,
2014
 
Expected term     4 years  
Volatility     151.52 %
Risk Free Rate     1.32 %

 

The proceeds of the Notes were allocated to the components as follows:

 

    Proceeds allocated
at issue date
 
Private Offering Notes   $ 34,272  
Private Offering Warrants     26,811  
Beneficial Conversion feature     3,917  
Total   $ 65,000  

 

12. SHAREHOLDERS’ DEFICIENCY

 

Stock Option Plan

 

On May 2, 2011 the Company adopted and executed the Employees’ Directors’ and Consultants Stock Option Plan (the “Plan”). During the three months ended March 31, 2014, the Company granted 42,500 options to non-employee directors which were fully vested upon issuance. During the three months ended March 31, 2013, the Company granted 50,000 options to non-employee directors which were fully vested upon issuance.

 

During the three months ended March 31, 2013, the Company granted 1,000,000 stock options to its then CEO of which 200,000 vested immediately. Due to his subsequent resignation in September 2013, all options have since been cancelled.

 

There were no grants of stock options to employees during the three months ended March 31, 2014.

 

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During the three months ended March 31, 2013 the Board of Directors extended the expiration dates for all options previously granted to one departing Board member in recognition for service.  The Company considered the extension as a modification to the option agreements recording incremental compensation expense of $16,920 for the three months ended March 31, 2013.

 

We estimated the fair value of each option on the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions:

 

   Three
 months
 Ended
   Three
months
 Ended
 
   March 31,
 2014
   March 31,
 2013
 
Dividend yield (1)   0.00%   0.00%
Expected volatility (2)     118.5 %    99.2% - 100.3%
Risk-free interest rates (3)   1.72%   0.63%
Expected lives (2)   5.0 YEARS     2.0-4.0 YEARS  

 

  (1) We have not paid cash dividends on our common stock since 1981, and currently do not have plans to pay or declare cash dividends. Consequently, we used an expected dividend rate of zero for the valuations.
  (2) Estimated based on our historical experience. Volatility was based on historical experience over a period equivalent to the expected life in years.
  (3) Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the options granted.

 

During the three months ended March 31, 2014, the Company recognized expense of $11,178 for stock options issued to directors and expense of $3,150 for stock options issued to employees.

 

During the three months ended March 31, 2013, the Company recognized expense of $14,250 for stock options issued to directors and expense of $80,267 for stock options issued to employees.

 

Preferred Stock

 

Holders of 5% preferred stock are entitled to receive, if, as, and when declared by the Board of Directors, out of funds legally available therefore, preferential non-cumulative dividends at the rate of $1.25 per share per annum, payable quarterly, before any dividends may be declared or paid upon or other distribution made in respect of any share of common stock. The 5% preferred stock is redeemable, in whole at any time or in part from time to time, on 30 days' notice, at the option of the Company, at a redemption price of $25. In the event of voluntary or involuntary liquidation, the holders of preferred stock are entitled to $25 per share in cash before any distribution of assets can be made to holders of common stock.

 

Each share of 5% preferred stock is entitled to one vote. Holders of 5% preferred stock have no preemptive or conversion rights. The preferred stock is not registered to be publicly traded.

 

At its December 2, 2010 meeting, the CTI Board of Directors declared a dividend distribution of one right (each, a “Right”) for each outstanding share of common stock, par value $0.01, of the Company (the “Common Shares”). The dividend was payable to holders of record as of the close of business on December 2, 2010 (the “Record Date”). Issuance of the dividend may be triggered by an investor purchasing more than 20% of the outstanding shares of common stock.

 

On December 15, 2010 the Company issued a $400,000 promissory note. The promissory note was scheduled to mature on December 31, 2012 with an annual interest rate of 5%.

 

On December 15, 2010, the Company's Board of Directors authorized the issuance of 750 shares of Series C Convertible Preferred Stock ($1,000 par value) with a 5% cumulative dividend to William R. Waters, Ltd. of Canada. On December 30, 2010, 750 shares were issued. The Company converted the above $400,000 promissory note into 400 shares and received cash of $350,000 for the remaining 350 shares.

 

Effective June 16, 2011, William R. Waters, Ltd. of Canada converted one half of its Series C Convertible Preferred Stock, or 375 shares, to 315,126 shares of common stock.

 

The rights of the Series C Convertible Preferred Stock are as follows:

 

  a)

Dividend rights – The shares of Series C Convertible Preferred Stock accrue a 5% cumulative dividend on a quarterly basis and is payable on the last day of each fiscal quarter when declared by the Company’s Board. As of March 31, 2014 dividends declared were $70,323, of which $4,623 were declared during the three months ended March 31, 2014 and $51,575 have not been paid and are shown in accrued and other liabilities at March 31, 2014.

 

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  b) Voting rights – Holders of these shares of Series C Convertible Preferred Stock shall have voting rights equivalent to 1,000 votes per $1,000 par value Series C Convertible Preferred share voted together with the shares of Common Stock

 

  c) Liquidation rights – Upon any liquidation these Series C Convertible Preferred Stock shares shall be treated as equivalent to shares of Common stock to which they are convertible.

 

  d) Redemption rights – The redemption rights were associated with the $750,000 that had been held in escrow by the Company in the event that the funds were released and returned to CTI.  However, the funds were withdrawn from escrow and paid out in accordance with the settlement agreement.  Therefore the redemption rights no longer apply to the remaining Series C Convertible Preferred Stock.

 

  e) Conversion rights – Holder has right to convert each share of Series C Convertible Preferred Stock at any time into shares of the Company's common stock at a conversion price for each share of common stock equal to 85% of the lower of (1) the closing market price at the date of notice of conversion or (2) the mid-point of the last bid price and the last ask price on the date of the notice of conversion. The variable conversion feature creates an embedded derivative that was bifurcated from the Series C Convertible Preferred Stock on the date of issuance and was recorded at fair value. The derivative liability will be recorded at fair value on each reporting date with any change recorded in the Statement of Operations as an unrealized gain (loss) on derivative instrument.

 

On the date of conversion of the 375 shares of Series C Convertible Preferred Stock the Company calculated the value of the derivative liability to be $81,933. Upon conversion, the $81,933 derivative liability was reclassified to equity.

 

The Company recorded a convertible preferred stock derivative liability of $66,176 and $80,408, associated with the 375 shares of Series C Convertible Preferred Stock outstanding at March 31, 2014 and December 31, 2013, respectively.

 

The Company has classified the Series C Convertible Preferred Stock as a liability at March 31, 2014 and December 31, 2013 because the variable conversion feature may require the Company to settle the conversion in a variable number of its common shares.

 

Common Stock

  

During the quarter ended March 31, 2014, the Company did a private offering of its common stock and warrants, for consideration of $500,000. 2,500,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 1,250,000 shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The warrants were recorded to additional paid-in-capital.

 

During the three months ended March 31, 2014 and 2013, the Company issued 10,625 and 3,750 shares of its common stock to non-employee directors under its Director Compensation Plan. The Company recorded expense of $4,038 and $655 for director stock compensation expense in the three months ended March 31, 2014 and 2013.

 

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13.           CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

 

As of March 31, 2014, CTI and its majority owned subsidiary, VVI, have remaining obligations, contingent upon receipt of certain revenues, to repay up to $165,701 and $198,365, respectively, in consideration of grant funding received in 1994 and 1995.  CTI also is obligated to pay at the rate of 7.5% of its revenues, if any, from transferring rights to certain inventions supported by the grant funds.  VVI is obligated to pay at rates of 1.5% of its net sales of supported products or 15% of its revenues from licensing supported products, if any.  

 

We have engaged R.F. Lafferty & Co. to seek an acquisition partner from a limited number of companies for our nanoparticle bone biomaterial patents, among other assets and/or securities.  The Company would pay Lafferty a 10% finder's fee in the event an acquisition partner is found, which management has deemed to be an immaterial and contingent obligation.

 

Contingencies – Litigation

 

Carolina Liquid Chemistries Corporation, et al. (case pending) – On August 29, 2005, we filed a complaint against Carolina Liquid Chemistries Corporation ("Carolina Liquid") in the United States District Court for the District of Colorado, alleging patent infringement of our patent covering homocysteine assays, and seeking monetary damages, punitive damages, attorneys’ fees, court costs and other remuneration at the option of the court. As we became aware of other infringers, we amended our complaint to add as defendants Catch, Inc. ("Catch") and the Diazyme Laboratories Division of General Atomics ("Diazyme"). On September 6, 2006, Diazyme filed for declaratory judgment in the Southern District of California for a change in venue and a declaration of non-infringement and invalidity. On September 12, 2006, the District Court in Colorado ruled that both Catch and Diazyme be added as defendants to the Carolina Liquid case.

 

On October 23, 2006, Diazyme requested the United States Patent and Trademark Office (the "USPTO") to re-evaluate the validity of our patent and this request was granted by the USPTO on December 14, 2006. On July 30, 2009, the U.S. Patent and Trademark Office’s Board of Patent Appeals and Interferences (“BPAI”) upheld the homocysteine patent. In September 2008, the examiner had denied the patent, but that denial was overruled by the BPAI. While the examiner had appealed that BPAI decision, delaying further action, that appeal was also denied by the BPAI on December 13, 2010. In June 2011, the examiner once again appealed the BPAI decision. In addition to responding to this new appeal, the Company petitioned the Director of the USPTO to help expedite further action on the case within the USPTO, which was to have been handled with special dispatch according to USPTO requirements for handling reexamination proceedings of patents involved in litigation.

 

On March 13, 2012, the USPTO issued the Ex Parte Reexamination Certificate confirming the patentability of claims examined. The company has begun collecting unpaid amounts from various obligated companies.

 

Employment matters – former employee (case pending) In September 2003, a former employee filed a whistleblower complaint with the Occupational Safety and Health Administration of the Department of Labor (OSHA) alleging that the employee had been terminated for engaging in conduct protected under the Sarbanes Oxley Act of 2002 (SOX). In February 2005, OSHA found probable cause to support the employee’s complaint and the Secretary of Labor ordered reinstatement and back wages since the date of termination and CTCC requested de novo review and a hearing before an administrative law judge (“ALJ”). In July 2005, after the close of the hearing on CTI’s appeal, the U.S. district court for Connecticut enforced the Secretary’s preliminary order of reinstatement and back pay under threat of contempt and the Company rehired the employee with back pay.

 

19
 

  

On October 5, 2005, the ALJ who conducted the hearing on CTI’s appeal of the OSHA findings ruled in CTI’s favor and recommended dismissal of the employee’s complaint. Although the employee abandoned his position upon notice of the ALJ’s decision, he nevertheless filed a request for review by the DOL Administrative Review Board ("ARB").

 

In May 2006, the U.S. Court of Appeals for the Second Circuit vacated the order of the district court enforcing the Secretary’s preliminary order of reinstatement and back pay. The employee also filed a new SOX retaliation complaint with OSHA based on alleged black listing action by CTI following his termination. OSHA dismissed the complaint and the employee filed a request for a hearing by an administrative law judge. Ultimately, the employee voluntarily dismissed the appeal.

 

In March 2008, the ARB issued an order of remand in the employee’s appeal of the October 2005 dismissal of his termination complaint, directing the ALJ to clarify her analysis utilizing the burden-shifting standard articulated by the ARB. In January 2009, the ALJ issued a revised decision again recommending dismissal and once again the employee appealed the ruling to the ARB. On September 30, 2011, the ARB issued a final decision and order affirming the ALJ’s decision on remand and dismissing the employee’s complaint. The employee has appealed the ARB's decision before the U.S. Court of Appeals for the Second Circuit which has ordered the employee to file his opening brief by May 31, 2012. Response briefs by the Solicitor's Office of the U.S. Department of Labor and CTI were submitted in August 2012. In March 2013, the U.S Court of Appeals for the Second Circuit upheld the ARB’s decision dismissing the former employee’s complaint and denied the employee’s appeal from that order. In April 2013, the Second Circuit terminated proceedings in that court.

 

Summary – We may be a party to other legal actions and proceedings from time to time. We are unable to estimate legal expenses or losses we may incur, if any, or possible damages we may recover, and we have not recorded any potential judgment losses or proceeds in our financial statements to date. We record expenses in connection with these suits as incurred.

 

We believe that we carry adequate liability insurance, directors and officers insurance, casualty insurance, for owned or leased tangible assets, and other insurance as needed to cover us against potential and actual claims and lawsuits that occur in the ordinary course of our business. However, an unfavorable resolution of any or all matters, and/or our incurrence of significant legal fees and other costs to defend or prosecute any of these actions and proceedings may, depending on the amount and timing, have a material adverse effect on our consolidated financial position, results of operations or cash flows in a particular period.

 

14.           RELATED PARTY TRANSACTIONS

 

Our board of directors determined that when a director's services are outside the normal duties of a director, we compensate the director at the rate of $1,000 per day, plus expenses, which is the same amount we pay a director for attending a one-day Board meeting.  We classify these amounts as consulting expenses, included in personnel and consulting expenses.

 

At March 31, 2014, $2,598,980 of the outstanding were Notes payable to related parties; $2,498,980 to the chairman of our Board and $100,000 to another director.

 

15.           SUBSEQUENT EVENT

 

On April 8, 2014, Mr. Giuseppe Marineo, an inventor of the Calmare® pain therapy device, and Delta Research and Development (“Delta”), Mr. Marineo’s research company, and Delta International Services and Logistics (“DIS&L”), Delta’s commercial arm in which Mr. Marineo is the sole beneficiary of all proceeds as its founder and sole owner (collectively the “Group”), issued a press release (the “Group’s Press Release”) regarding Competitive Technologies, Inc. (“CTI” or the “Company”) stating that the Company did not have authority to sell, distribute and manufacture Calmare as an exclusive agent of the Group. CTI issued a corporate response in a press release dated April 11, 2014 stating that the Group’s Press Release was inaccurate and has since been purged by the overseeing body of wire services.

 

As disclosed in the Company’s Annual Report on Form 10-K on April 16, 2014, this dispute between the Company and the Group is over the validity of a 2012 Amendment to a Sales and Representation Agreement (the “Amendment”) which, if valid and enforceable, would have compromised its rights to sell, distribute and manufacture Calmare as an exclusive agent of the Group in the global marketplace, especially in the European, Middle Eastern and North African (“EMENA”) territory which was responsible for approximately 70% of gross Calmare sales in 2011. However, the Company believes that the Amendment is neither valid nor enforceable as it was never duly signed or authorized and subsequently deemed null and void as disclosed on April 16, 2014 in the Form 10-K filing. Therefore, the parties’ rights are determined by an earlier agreement whereby the Company still possesses the authority to sell, distribute and manufacture Calmare as a world-wide exclusive agent of the Group.

 

On April 16, 2014, counsel for the Group (“Group Counsel”) sent a cease and desist letter (“Cease and Desist Letter”) to the Company, requesting a confirmation that the Company would no longer hold itself out as an agent of the Group permitted to sell, distribute and manufacture Calmare world-wide including the EMENA territory.

 

The Company responded on April 25, 2014 to the Cease and Desist Letter, disputing Group Counsel’s interpretation of the events surrounding the execution of the Amendment. At this time the Company is pursuing a reasonable and amicable resolution to the situation.

 

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Statements about our future expectations are “forward-looking statements” within the meaning of applicable Federal Securities Laws, and are not guarantees of future performance. When used in herein, the words “may,” “will,” “should,” “anticipate,” “believe,” “intend,” “plan,” “expect,” “estimate,” “approximate,” and similar expressions are intended to identify such forward-looking statements. These statements involve risks and uncertainties inherent in our business, including those set forth in Item 1A under the caption "Risk Factors," in our most recent Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (“SEC”) on April 16, 2014, (subsequently amended in a Form 10-K/A, filed with the SEC on April 30, 2014) and other filings with the SEC, and are subject to change at any time. Our actual results could differ materially from these forward-looking statements. We undertake no obligation to update publicly any forward-looking statement.

 

Overview

 

Competitive Technologies, Inc. (“CTI”) was incorporated in Delaware in 1971, succeeding an Illinois corporation incorporated in 1968. CTI and its majority-owned subsidiary (collectively, "we,” “our,” or “us”), is a biotechnology company developing and commercializing innovative products and technologies. CTI is the licensed distributor of the non-invasive Calmare pain therapy medical device, which incorporates the biophysical “Scrambler Therapy” technology developed to treat neuropathic and cancer-derived pain.

 

Since 2011, the Company has controlled the sales process for its Calmare® medical device. We are the primary obligor, responsible for delivering devices as well as training our customers in the proper use of the device. We deal directly with customers, setting pricing and providing training; work directly with the inventor of the technology to develop specifications and any changes thereto and to select and contract with manufacturing partners; and retain significant credit risk for amounts billed to customers. Therefore, all product sales are recorded following a gross revenue methodology. We record in product sales, the total funds earned from customers and record the costs of the device as cost of product sales, with gross profit from product sales being the result.

 

Sales of our Calmare device continue to be the major source of revenue for the Company. The Company initially acquired the exclusive, worldwide rights to the Scrambler Therapy® technology in 2007. The Company's 2007 agreement with Giuseppe Marineo ("Marineo"), an inventor of Scrambler Therapy technology, and Delta Research and Development ("Delta"), authorizes CTI to manufacture and sell worldwide the device developed from the patented Scrambler Therapy technology. The Scrambler Therapy technology is patented in Italy and in the U.S., effective in February 2013. Applications for patents have been filed internationally as well and are pending approval. The Calmare device has CE Mark certification from the European Union as well as U.S. FDA 510(k) clearance.

 

In 2011, the Company negotiated an extension to the agreement Marineo and Delta. This agreement extended the Company’s exclusive, worldwide rights to the Scrambler Therapy® technology until March 31, 2016.

 

Dispute with Marineo and Delta

 

On April 8, 2014, Mr. Giuseppe Marineo, Mr. Marineo’s research company, and Delta International Services and Logistics (“DIS&L”), Delta’s commercial arm in which Mr. Marineo is the sole beneficiary of all proceeds as its founder and sole owner (collectively the “Group”), issued a press release (the “Group’s Press Release”) stating that the Company did not have authority to sell, distribute and manufacture Calmare as an exclusive agent of the Group.

 

As disclosed in the Company’s Annual Report on Form 10-K on April 16, 2014, and in a Current Report on Form 8-K on April 29, 2014, this dispute between the Company and the Group is over the validity of a 2012 Amendment to a Sales and Representation Agreement (the “Amendment”) which, if valid and enforceable, would have compromised its rights to sell, distribute and manufacture Calmare as an exclusive agent of the Group in the global marketplace, especially in the European, Middle Eastern and North African (“EMENA”) territory which was responsible for approximately 70% of gross Calmare sales in 2011. However, the Company believes that the Amendment is neither valid nor enforceable as it was never duly signed or authorized and subsequently deemed null and void. Therefore, the parties’ rights are determined by an earlier agreement whereby the Company still possesses the authority to sell, distribute and manufacture Calmare as a world-wide exclusive agent of the Group.

 

On April 16, 2014, counsel for the Group (“Group Counsel”) sent a cease and desist letter (“Cease and Desist Letter”) to the Company, requesting a confirmation that the Company would no longer hold itself out as an agent of the Group permitted to sell, distribute and manufacture Calmare world-wide including the EMENA territory.

 

The Company responded on April 25, 2014 to the Cease and Desist Letter, disputing Group Counsel’s interpretation of the events surrounding the execution of the Amendment. At this time the Company is pursuing a reasonable and amicable resolution to the situation.

 

21
 

  

Presentation

 

We rounded all amounts in this Item 2 to the nearest thousand dollars.

 

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our financial condition and results of operations.  This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto.

 

Results of Operations – Three months ended March 31, 2014 vs. three months ended March 31, 2013

 

Summary of Results

 

Our net loss, for the quarter ended March 31, 2014, decreased to $726,000 or $0.04 per basic and diluted share as compared with a net loss of $782,000 or $0.05 per basic and diluted share for the comparable quarter of 2013.  This net loss decrease is largely attributable to a $221,000 increase in sales and a $207,000 decrease in general and administrative expenses, partially offset by a $72,000 increase in interest expense, a $54,000 increase in personnel and consulting expenses and a non recurring $132,000 loss on settlement of note and warrant.

 

Revenue and Gross Profit from Sales

 

Revenue from the sale and shipment of Calmare® pain therapy medical devices (the “Devices”), in the three months ended March 31, 2014, increased $221,000 to $221,000 as compared with $0 for the comparable quarter of 2013.

 

Cost of product sales, in the three months ended March 31, 2014, increased $51,000 to $70,000 as compared with $19,000 in the three months ended March 31, 2013. This increase in cost of product sold is attributable to CTI’s limited unit sales in the prior quarter.

 

Device sales, in the three months ended March 31, 2014, increased significantly with the sale of three (3) Devices as compared with zero (0) Device sales for the comparable quarter of 2013.

 

Due to the relatively long sales cycle for a Device, Device sales and related revenues and expenses can vary significantly from quarter to quarter.

 

Other Revenue

 

Retained royalties, in the three months ended March 31, 2014, decreased $10,000 to $3,000 as compared with $13,000 in the three months ended March 31, 2013.  

 

Other income, for the three months ended March 31, 2014, decreased $45,000 to $4,000 as compared with $49,000 in the three months ended March 31, 2013.  Other income includes:

 

   Three 
Months 
Ended
March 31,
2014
   Three 
Months 
Ended
March 31,
2013
 
Training payments and the sale of supplies such as electrodes and cables for use with
our Calmare® devices
  $2,000   $3,000 
Rental income from customers who were renting Calmare® pain therapy medical devices from CTI  $2,000   $8,000 

 

 In addition to the above mentioned items, the Company received a one-time payment of $38,000 in the first quarter of 2013 from one of our insurance companies related to its conversion to a stock insurance company. 

 

22
 

  

Expenses

 

Total expenses increased $59,000 or 7% to $884,000 in the three months ended March 31, 2014 as compared with $825,000 in the three months ended March 31, 2013.

 

Selling expenses increased 6% or $4,000 to $72,000 in the three months ended March 31, 2014 as compared with $68,000 in the three months ended March 31, 2013 and reflects increased commissions as a result of increased Devices sales offset by reduced patent and other direct costs related to the Calmare pain device.

 

Personnel and consulting expenses, in the three months ended March 31, 2014, increased 16% or $54,000 to $395,000 as compared with $341,000 in the three months ended March 31, 2013. This increase is primarily related to differences between periods in executive compensation. The three months ended March 31, 2014 includes an accrual for estimated bonus compensation whereas no such accrual was recorded in the three months ended March 31, 2013. However partially offsetting this difference was stock option expense for employees of $3,000 for the three months ended March 31, 2014 as compared to $80,000 for the three months ended March 31, 2014. The significant stock option expense in the three months ended March 31, 2013 was associated with stock options issued to the Company’s then CEO. As part of his compensation package, 1,000,000 options were granted in March 2013, 200,000 of which vested immediately and as such resulted in expense during the three months ended March 31, 2013.

 

General and administrative expenses, in the three months ended March 31, 2014, decreased 52% or $207,000 to $194,000 as compared with $401,000 in the three months ended March 31, 2013.  The decrease reflects:

 

a)$34,000 decrease in Directors fees and expenses, primarily related to share-based compensation;
b)

$44,000 decrease in investor and public relations expenses, primarily as a result of terminating certain management consulting arrangements;

c)$73,000 decrease in legal expenses, primarily related to corporate counsel matters; and
d)$33,000 decrease in accounting and tax expenses.

 

Interest expense, in the three months ended March 31, 2014, increased $72,000 to $105,000 as compared with $33,000 in the three months ended March 31, 2013. This large increase is due to an increase in the use of debt financing.

 

Loss on settlement of note and warrant, during the three months ended March 31, 2014 the Company cash settled the warrant previously issued to Tonaquint for a loss of $98,000 and also recorded a $34,000 loss related to modification in terms to the original note agreement, which was cash settled in the second quarter of 2014 (see Note 11 of the Notes to Condensed Consolidated Interim Financial Statements).

 

Unrealized gain on derivative instruments, in the three months ended March 31, 2014, was $14,000, as compared with the $18,000 gain recorded in the three months ended March 31, 2013.  This reflects the impact of the movement in CTI’s share price on the Class C Preferred Stock at the end of each period.

 

23
 

  

Financial Condition and Liquidity

 

Our liquidity requirements arise principally from our working capital needs, including funds needed to sell our current technologies and obtain new technologies or products, and protect and enforce our intellectual property rights, if necessary. We fund our liquidity requirements with a combination of cash on hand, debt and equity financing, sales of common stock and cash flows from operations, if any, including royalty legal awards. At March 31, 2014, the Company had outstanding debt in the form of promissory notes with a total principal amount of $3,277,000 and a carrying value of $3,117,000.

 

Our future cash requirements depend on many factors, including results of our operations and marketing efforts, results and costs of our legal proceedings, and our equity financing.  To achieve and sustain profitability, we are implementing a corporate reengineering effort, which commenced on September 26, 2013 under the direction of CTI’s new president & CEO, Mr. Conrad Mir. This plan design will change the inherent design of the current distributor network and focus on opportunities within the US Departments of Defense (the “DOD”) and Veterans Affairs (“VA”), and set out to upgrade CTI’s current U.S. Food and Drug Administration (“FDA”) clearance designation for the Calmare Pain Device to approval. Although we cannot be certain that we will be successful in these efforts, we believe the combination of our cash on hand and revenue from executing our strategic plan will be sufficient to meet our obligations of current and anticipated operating cash requirements.

 

In fiscal 2010, the Company incorporated revenue from the sale of inventory into its revenue stream.  That source of revenue is expected to continue as sales of its Calmare pain therapy medical device continue to expand and other products are added to the Company's portfolio of technologies.

 

At March 31, 2014, cash was $344,000, as compared with $57,000 at December 31, 2013. Net cash used in operating activities was $(212,000) for the three months ended March 31, 2014 as compared to $(520,000) for the three months ended March 31, 2013, primarily reflecting the decrease in the current period net loss between periods, non cash interest expense and loss on settlement of the note and warrant in the current period and favorable changes in current assets/liabilities. There was minimal investing activity year to date in 2014 and 2013. Net cash provided by financing activities was $502,000 for the three months ended March 31, 2014 as compared to $505,000 for the three months ended March 2013, primarily as a result of the Company’s debt and equity financing activities in both periods.

 

We currently have the benefit of using a portion of our accumulated net operating losses (NOLs) to eliminate any future regular federal and state income tax liabilities.  We will continue to receive this benefit until we have utilized all of our NOLs, federal and state.  However, we cannot determine when and if we will be profitable enough to utilize the benefit of the remaining NOLs before they expire.

 

Going Concern

 

The Company has incurred operating losses since fiscal 2006 and has a working capital deficiency at March 31, 2014.  During the three months ended March 31, 2014 and 2013, we had a significant concentration of revenues from our Calmare® pain therapy medical device technology.  We continue to seek revenue from new and existing technologies or products to mitigate the concentration of revenues, and replace revenues from expiring licenses on other technologies.

 

Although we have taken steps to significantly reduce operating expenses going forward, even at these reduced spending levels, should the anticipated increase in revenue from sales of Calmare® medical devices and other technologies not occur, the Company may not have sufficient cash flow to fund operations through 2014. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company's continuation as a going concern is dependent upon its developing recurring revenue streams sufficient to cover operating costs.  The Company does not have any significant individual cash or capital requirements in the budget going forward.  If necessary, CTI will meet anticipated operating cash requirements by further reducing costs, issuing debt and/or equity, and/or pursuing sales of certain assets and technologies while we pursue licensing and distribution opportunities for our remaining legacy portfolio of technologies.  There can be no assurance that the Company will be successful in such efforts.  Failure to develop a recurring revenue stream sufficient to cover operating expenses could negatively affect the Company’s financial position.

 

 

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Debt Financing

 

Details of notes payable as of March 31, 2014 is as follows:

 

    Principal
Amount
    Carrying
Value
    Cash
Interest
Rate
    Common
Stock
Conversion
Price
    Maturity
Date
90 day Convertible Notes (Chairman of the Board)   $ 2,498,980     $ 2,498,980       6 %   $ 1.05     Various 2014
24 month Convertible Notes ($100,000 to Board member)     225,000       225,000       6 %     1.05     March 2014 –
June 2014
Tonaquint 9% OID Convertible Notes (1)     112,500       118,536       7 %     0.30     May 2014
Southridge Convertible Note     12,000       12,000       None       75% of closing
bid
    June 2014
Series A1 15% OID Convertible Notes and Warrants     149,412       100,076       None       0.20     August 2014
Series A2 15% OID Convertible Notes and Warrants     134,236       91,127       None       0.25     September 2014
Series A3 15% OID Convertible Notes and Warrants     64,706       37,007       None       0.25     January 2015
Series B OID Convertible Notes and Warrants     80,000       34,272       None       0.35     March 2017
Notes Payable, gross   $ 3,276,834       3,116,998                      
Less LPA amount             (485,980 )                    
Notes Payable, net           $ 2,631,018                      

 

(1) Original terms noted above. The Company executed a debt settlement agreement with Tonaquint during the first quarter of 2014, cash-settled the warrant during the first quarter of 2014 and cash-settled the note during the second quarter of 2014. See further discussion below under “Tonaquint 9% Original Issue Discount Convertible Notes and Warrants”.

 

90 day Convertible Notes

The Company has issued 90-day notes payable to borrow funds from a director, now the chairman of our Board, as follows:

 

2013   $

1,188,980

 
2012     1,210,000  
2011     100,000  
Total   $ 2,498,980  

 

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These notes have been extended several times and all bear 6.00% simple interest.  A conversion feature was added to the Notes when they were extended, which allows for conversion of the eligible principal amounts to common stock at any time after the six month anniversary of the effective date –the date the funds are received – at a rate of $1.05 per share.  Additional terms have been added to all Notes to include additional interest payments to all Notes if extended beyond their original maturity dates and to provide the lender with a security interest in unencumbered inventory and intangible assets of the Company other than proceeds relating to the Calmare device and accounts receivable.

 

A total of $485,980 of the aforementioned notes issued between December 1, 2012 and March 31, 2013 fall under the liabilities purchase agreement with ASC Recap, and are expected to be repaid using the process as described in Note 10.  Because there can be no assurance that the Company will be successful in completing this process, the Company retains ultimate responsibility for this debt, until fully paid down.  As a result, the Company continues to accrue interest on these notes and they remain convertible as described above.

 

24 month Convertible Notes

 

In March 2012, the Company issued a 24-month convertible promissory note to borrow $100,000. Additional 24-month convertible promissory notes were issued in April 2012 ($25,000) and in June 2012 ($100,000). All of the notes bear 6.00% simple interest. Conversion of the eligible principal amounts to common stock is allowed at any time after the six month anniversary of the effective date of each note at a rate of $1.05 per share.

 

As of May 14, 2014 the Company has not repaid the principal due on the March 2012 $100,000 note or the April 2012 $25,000 note and as such is in default under the terms of the notes. There is also unpaid interest related to these notes.

 

Tonaquint 9% Original Issue Discount Convertible Notes and Warrants

 

During the quarter ended September 30, 2013, the Company entered into a securities purchase agreement with Tonaquint, Inc., under which it was issued a $112,500 convertible promissory note in consideration for $100,000, the difference between the proceeds from the Note and the principal amount consisted of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue discounted was being amortized over the life of the note. The note was convertible at an initial conversion price of $0.30 per share at any time, and contained a “down-round protection” feature that requires the valuation of a derivative liability associated with the note. The note bore interest at 7% and was due in May 2014. Tonaquint was also issued a market-related warrant for $112,500 in shares of common stock with a “cashless” exercise feature. The warrant had a $0.35 exercise price, a 5-year term and included a “down-round protection” feature that required it to be classified as a liability rather than as equity (see Note 6 of the Notes to Condensed Consolidated Interim Financial Statements).

 

During the first quarter of 2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant. The warrant was settled during the first quarter of 2014 for a cash payment of $98,000, resulting in a loss of $98,000. The note was settled during the second quarter of 2014 for cash payments totaling $144,000 ($20,000 in the first quarter of 2014 and $124,000 in the second quarter of 2014). Because the execution of the debt settlement agreement in the first quarter of 2014 resulted in a significant modification of the original terms of the note agreement, the Company adjusted the carrying value of the note in the first quarter of 2014 and recorded a related loss of approximately $34,000.

 

Southridge

 

During 2013, the Company issued a six-month $12,000 convertible note payable to Southridge to cover legal expenses as part of the LPA (see Note 11 of the Notes to Condensed Consolidated Interim Financial Statements). The convertible note is convertible into the Company’s common stock at 75% of the lowest closing bid price during the twenty (20) trading days prior to conversion and is due June 2014.

 

26
 

 

Series A 15% Original Issue Discount Convertible Notes and Warrants

 

During the quarter ended December 31, 2013, the Company did a private offering of two tranches of convertible notes and warrants, under which it issued $283,648 of convertible promissory notes for consideration of $241,100, the difference between the proceeds from the notes and the principal amount consists of $42,548 of original issue discount. During the quarter ended March 31, 2014, the Company did a private offering of a third tranche of convertible notes and warrants, under which it issued $64,706 of convertible promissory notes for consideration of $55,000, the difference between the proceeds from the notes and principal amount consists of $9,706 of original issue discount. The notes are convertible at initial conversion prices ranging from $0.20 to $0.25 per share anytime after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 958,179 in shares of common stock. The warrants have exercise prices that range from $0.40 to $0.60 and a 2-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The total debt discount is amortized over the life of the notes to interest expense.

 

Series B Original Issue Discount Convertible Notes and Warrants

 

During the quarter ended March 31, 2014, the Company did a private offering of convertible notes and warrants, under which it issued $80,000 of convertible promissory notes for consideration of $65,000, the difference between the proceeds from the notes and principal amount consists of $15,000 of original issue discount. The notes are convertible at an initial conversion price of $0.35 per share anytime after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 185,714 in shares of common stock. The warrants have an exercise price of $0.45 and a 4-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.

  

Capital requirements

 

We continue to seek revenue from new technology licenses to mitigate the concentration of revenue, and replace revenue from expiring licenses.  We have created a new business model for appropriate technologies that allows us to move beyond our usual royalty arrangement and share in the profits of distribution.

 

For 2014, we expect our capital expenditures to be less than $100,000.

 

Contractual Obligations and Contingencies

 

Contingencies.  Our directors, officers, employees and agents may claim indemnification in certain circumstances.  We seek to limit and reduce our potential financial obligations for indemnification by carrying directors’ and officers’ liability insurance, subject to deductibles.

 

We also carry liability insurance, casualty insurance, for owned or leased tangible assets, and other insurance as needed to cover us against claims and lawsuits that occur in the ordinary course of business.

 

Many of our license and service agreements provide that upfront license fees, license fees and/or royalties we receive are applied against amounts that our clients or we have incurred for patent application, prosecution, issuance and maintenance costs.  If we incur such costs, we expense them as incurred, and reduce our expense if we are reimbursed from future fees and/or royalties we receive.  If the reimbursement belongs to our client, we record no revenue or expense.

 

27
 

  

We have engaged R.F. Lafferty & Co. to seek an acquisition partner from a limited number of companies for our nano particle bone biomaterial patents, among other assets and/or securities.  The Company would pay Lafferty a 10% finder's fee in the event an acquisition partner is found, which Management has deemed to be an immaterial and contingent obligation.

 

As of March 31, 2014, CTI and its majority-owned subsidiary, VVI, have remaining obligations, contingent upon receipt of certain revenue, to repay up to $165,701 and $198,365, respectively, in consideration of grant funding received in 1994 and 1995.    CTI also is obligated to pay at the rate of 7.5% of its revenues, if any, from transferring rights to certain inventions supported by the grant funds.  VVI is obligated to pay at rates of 1.5% of its net sales of supported products or 15% of its revenues from licensing supported products, if any.  

 

Critical Accounting Estimates

 

There have been no significant changes in our accounting estimates described under the caption “Critical Accounting Estimates” included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual report on Form 10-K for the year ended December 31, 2013.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4.  Controls and Procedures

 

(a)           Evaluation of disclosure controls and procedures

 

Management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2014.  Our disclosure controls and procedures are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized, and reported, within the time periods specified in the Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of March 31, 2014.

 

(b)           Change in Internal Controls

 

During the period ending March 31, 2014, there were no changes in our internal control over financial reporting during that period that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

28
 

  

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ended December 31, 2013, the Company did a private offering of two tranches of convertible notes and warrants, under which it issued $283,648 of convertible promissory notes for consideration of $241,100, the difference between the proceeds from the notes and the principal amount consists of $42,548 of original issue discount. During the quarter ended March 31, 2014, the Company did a private offering of a third tranche of convertible notes and warrants with 3 investors, under which it issued $64,706 of convertible promissory notes for consideration of $55,000, the difference between the proceeds from the notes and principal amount consists of $9,706 of original issue discount. The notes are convertible at initial conversion prices ranging from $0.20 to $0.25 per share anytime after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 958,179 in shares of common stock. The warrants have exercise prices that range from $0.40 to $0.60 and a 2-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The total debt discount is amortized over the life of the notes to interest expense.

 

During the quarter ended March 31, 2014, the Company did a private offering of convertible notes and warrants with one investor, under which it issued $80,000 of convertible promissory notes for consideration of $65,000, the difference between the proceeds from the notes and principal amount consists of $15,000 of original issue discount. The notes are convertible at an initial conversion price of $0.35 per share anytime after issuance thereby having an embedded beneficial conversion feature. The note holders were also issued market-related warrants for 185,714 in shares of common stock. The warrants have an exercise price of $0.45 and a 4-year term. The beneficial conversion feature and the warrants were recorded to additional paid-in-capital. The Company allocated the proceeds received to the notes, the beneficial conversion feature and the warrants on a relative fair value basis at the time of issuance. The total debt discount is amortized over the life of the notes to interest expense.

 

During the quarter ended September 30, 2013, the Company entered into a securities purchase agreement with Tonaquint, Inc., under which it was issued a $112,500 convertible promissory note in consideration for $100,000, the difference between the proceeds from the Note and the principal amount consisted of a $10,000 original issue discount and a carried transaction expense of $2,500. The original issue discounted was being amortized over the life of the note. The note was convertible at an initial conversion price of $0.30 per share at any time, and contained a “down-round protection” feature that requires the valuation of a derivative liability associated with the note. The note bore interest at 7% and was due in May 2014. Tonaquint was also issued a market-related warrant for $112,500 in shares of common stock with a “cashless” exercise feature. The warrant had a $0.35 exercise price, a 5-year term and included a “down-round protection” feature that required it to be classified as a liability rather than as equity (see Note 6 of the Notes to Condensed Consolidated Interim Financial Statements).

 

During the first quarter of 2014 the Company executed a debt settlement agreement with Tonaquint related to the note and warrant. The warrant was settled during the first quarter of 2014 for a cash payment of $98,000, resulting in a loss of $98,000. The note was settled during the second quarter of 2014 for cash payments totaling $144,000 ($20,000 in the first quarter of 2014 and $124,000 in the second quarter of 2014).

 

During the quarter ended March 31, 2014, the Company did a private offering of its common stock and warrants to 8 investors, for consideration of $500,000. 2,500,000 shares of common stock were issued at a per share price of $0.20. The common stock holders were also issued warrants to purchase 1,250,000 shares of common stock. The warrants have an exercise price of $0.60 and a 1-year term. The warrants were recorded to additional paid-in-capital.

 

The above securities were issued to the individuals identified in connection with a transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”) and/or Rule 506 promulgated under the Securities Act. The investors are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act.

 

29
 

  

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No Description Filing Method
3.1   Unofficial restated certificate of incorporation of the registrant as amended to date filed.(1)   Incorporated by reference
         
3.2   Bylaws of the registrant as amended effective October 14, 2005.(2)   Incorporated by reference
         
10.1   Securities Purchase Agreement with Tonaquint, Inc. dated July 16, 2013.(3)   Incorporated by reference
         
10.2   Equity Purchase Agreement with Southridge Partners II, L.P. dated September 10, 2013.(4)   Incorporated by reference
         
31.1   Certification by the Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).   Filed herewith
         
         
32.1   Certification by the Chief Executive Officer and Chief Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).    Filed herewith
         
101.INS   XBRL Instance Document   Filed herewith
         
101.SCH   XBRL Taxonomy Schema   Filed herewith
         
101.CAL   XBRL Taxonomy Calculation Linkbase   Filed herewith
         
101.DEF   XBRL Taxonomy Definition Linkbase   Filed herewith
         
101.LAB   XBRL Taxonomy Label Linkbase   Filed herewith
         
101.PRE   XBRL Taxonomy Presentation Linkbase   Filed herewith

 

  (1) Filed as Exhibit 4.1 to the registrant’s registration statement on Form S-8 with the SEC on April 1, 1998.
  (2) Filed as Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on December 12, 2005.
  (3) Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on September 5, 2013.
  (4) Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on September 11, 2013.

 

30
 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  COMPETITIVE TECHNOLOGIES, INC.
  (the registrant)
     
  By /s/ Conrad Mir                              
    Conrad Mir
    President, Chief Executive Officer, and interim CFO
May 14, 2014  

Authorized Signer(Duly Authorized Officer, Principal Executive Officer, and

Principal Financial and Accounting Officer)

 

31